Investors cite the city's booming economy and open borders as its best attributes

A new book by financial adviser and author Hilliard MacBeth says that Canadian home prices are about to fall by nearly 50 per cent, leading to the biggest housing crash the country has ever seen – but its author says this could present an opportunity for well-financed investors.

"Investors who own properties with substantial equity can hang on without any trouble and they will see a new supply of renters who will be looking to rent after being burned as owners," MacBeth, a portfolio manager at Richardson GMP in Edmonton told CREW.

"That will make the rental market more balanced and it will be easier to find a positive cash-flow situation if rents increase. Of course, being well-financed will be the key to taking advantage of this change in the rental market."

The book, ‘When the Bubble Bursts’, which is to be published this month, says the reasons for this impending crash are years of ultra-low borrowing rates and home values bloated beyond the income levels needed to support them.

"Canada has a financing system through the CMHC where banks and other lenders can offer mortgages without taking much risk," Hilliard added.

"Household debt increased from $1 trillion to $1.8 trillion in 10 years between 2005 to 2015. About 3/4 of this total carries some form of government insurance or government guarantee. It’s important to understand that the insurance protects only the lend and the homeowner is still at risk for the total loss if the housing bubble bursts.

"An increase of that amount in such a short time is very rare, but when it has happened in other countries, it’s always been followed by a financial crisis, as the borrowing is used to buy illiquid assets such as real estate.

A number of analysts and economists have expressed concern that Canada is in a housing bubble, with the Bank of Montreal’s latest report, published in February, calling markets like Calgary, Edmonton and Ottawa “very weak” and hot markets like Toronto and Vancouver “balanced”.

MacBeth says the first market to correct will almost certainly be Calgary, which has an affordability multiple (ratio of house price to household income) of around 4.5 times, since incomes there are high compared to the rest of the country.

"But now incomes will drop, perhaps substantially, and therefore to get that ratio back to affordability might require a very large correction," added MacBeth. "Edmonton is similar to Calgary, although slightly less exaggerated."

In Toronto, MacBeth sees the condo market setting a dangerous precedent. "The surplus of condos in Toronto that is developing is dangerous too, as an oversupply of units could mean that condos, which are difficult to sell except when brand new, will be dumped on to the market by investors who have borrowed most of the money, or by lenders who have foreclosed on the properties," he said.

He advises that investors and homebuyers diversify away from the housing market instead. "Be careful to diversify outside of Canada and away from real estate as many listed equities in the financial and real estate sectors will be hit by the crisis in residential real estate."

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